Royal Mail has proposed a new pensions deal comprising defined benefit (DB) and defined contribution (DC) options for members following the planned closure of its current defined benefit (DB) pension scheme to future accrual in 2018.

Under the proposals, affected employees would be offered a choice between a DB cash balance arrangement and a defined contribution (DC) scheme. The new DB and DC schemes would be set up as new sections of the existing pension plan, replacing the current DB arrangement that will close to future accrual from 31 March 2018.

The DB cash balance scheme would provide its members with a lump sum at retirement. The DB scheme would involve members’ pension pots being credited with 19.6% of pensionable pay a year, including a 13.6% employer contribution and a 6% member contribution. Royal Mail would also contribute 2% for other member benefits, such as death in service and ill-health.

The DC option would also see the organisation contribute 13.6% of pensionable pay.

The new schemes would be effective from 1 April 2018.

In addition to the new arrangements, Royal Mail also proposes improvements to its existing DC plan from 1 April 2018. This would include increasing the organisation’s standard contribution by 1% in each tier, up to a maximum of 10%. This would apply to all current and future members of the scheme.

The updated pension proposals have been offered to the Communication Workers Union (CWU) and the Unite Communication Managers Association (CMA). Unite plans to hold a consultative ballot with its 6,000 Royal Mail manager members, which will close on Monday 7 August 2017.

The consultation proposed moving current DB members into a DC arrangement, either as a new section of the DB plan or by joining the Royal Mail DC pension scheme. As of 31 March 2018, the consultation also proposed that active members of the DB scheme would receive a one-off £750 payment, which could be contributed to their DC pension or taken as cash.

Royal Mail closed its DB pension scheme to new members in April 2008, and its DC scheme currently has more than 40,000 members.

A spokesperson at Royal Mail said: “We have had extensive talks with our unions, Unite/CMA and the CWU, on a sustainable and affordable solution for retirement benefits for plan members after 31 March 2018, when the plan in its current form will close to future accrual.

“The [organisation] is now offering members a choice between a defined benefit scheme and a defined contribution scheme, set up as new sections of the Royal Mail Pension Plan.

“The [organisation] expects that the overall cost of the proposal will be funded within its current £400 million annual pension contribution. Royal Mail believes that the risk to the [organisation] of the proposed defined benefit cash balance scheme would be materially lower than under the current plan and is a manageable risk for us.”

Brian Scott, officer for the Royal Mail at Unite, added: “We are committed to holding a membership consultative ballot on the Royal Mail’s latest proposals, which will close on 7 August. We are not making any recommendation. We think it is important that Unite members have an opportunity to express an opinion on what is being put forward by the [organisation].

“The latest position is an improvement from the original proposal and through our discussions we have achieved these improvements. One of the main developments is that we will keep the defined benefit pension scheme open and the lump sum approach being put forward will become a separate section of that scheme. This will reduce any adverse impact on members’ future retirement incomes.

“We have had many discussions with the [organisation] over the last few months and these have been difficult. However, the Unite negotiating team consider that what is on offer is the best achievable in the circumstances.”

Terry Pullinger, deputy general secretary, postal at the CWU, said: “The CWU rejects the latest proposal from Royal Mail. It does not meet our aspiration of a wage in retirement pension scheme, but rather still promotes the conventional wisdom of a cash-out arrangement at the point of retirement. While using elements of the CWU’s proposed wage in retirement scheme, it would still represent a significant shortfall in the pensions promise and it is not something that we are prepared to recommend to our members.”